Free Marketeer
Brian Trumbore
President/Editor, StocksandNews.com

We hear his name and his main treatise thrown around quite a bit, but just who was Adam Smith and why is he recognized as the father of the free market?

Adam Smith (1723-90) was born in Scotland (Kirkcaldy, Fife). By 1751 he was named a Professor of Logic at Glasgow and later a Professor of Moral Philosophy.

Smith, it turns out, was a classic absent-minded professor. He became quite a sight in Edinburgh and Glasgow, where he would walk the streets in a trance with his 'worm-like' gait, half- dressed, twitching all over while heatedly debating himself. Smith once walked straight into a tanning pit in full discourse. He always lived with his mother, it is also said.

Adam Smith first entered the realm of economics by asking himself the implications of human greed, and how self-interest could work for the common good. The end result turned out to be a 1776 book titled "An Inquiry into the Nature and Causes of the Wealth of Nations," a textbook of political economy.

Historian Richard Brookhiser describes the publication of "Wealth of Nations" in the same year as the Declaration of Independence as "a rich and resonant coincidence?as if to signal that the United States was the twin of the free market."

And indeed Smith himself weighed in on the political goings on back in the colonies. In deducing that you could increase national wealth by reducing barriers that hinder growth, Smith argued that it wasn't necessary to have en empire (a la the Britain of that time) in order to prosper and he specifically pointed to the American colonies, predicting they would become independent and that this would not result in a loss to British trade.

So let's examine Smith's main precepts as laid out in "Wealth of Nations."

Smith was going up against the prime economic philosophy of his era, that being 'mercantilism.' This was the theory that "in order to prosper, the modern state needed to manipulate every available legal, administrative, military, and regulatory device." [Norman Davies] Merchants of the time looked to the state to provide financial, political and military protection. Mercantilism equated to protectionism.

Adam Smith argued in "Wealth of Nations" that each person should be "free to pursue his own interest his own way," and that the "wretched spirit of monopoly" made people less energetic, while "the virtue of the marketplace" would enhance social happiness and civic virtue.

Smith thus sought to limit the functions of government to defense, internal security, and the provision of reasonable laws and fair law courts by which private differences could be adjudicated. His ideal society would be led by a leisured aristocracy, which evolves into his proposed doctrine of Laissez- Faire: governments should not interfere in economic affairs and free trade increased wealth.

Smith was suspicious of businessmen, advocating that freer markets and freer trade acted as a way of disciplining them through competition, and this competition should exist between many small- and medium-sized companies. [Economist Henry Kaufman notes that Smith probably wouldn't be pleased by the corporate behemoths of today whose successes and failures can send shock waves through the global economy and society.]

Adam Smith wrote that a division of labor in an unregulated market was the key to securing higher profits and maximum prosperity for all because it would be controlled by the invisible hand of commerce, regulated by supply and demand.

In other words, if there was a shortage of a certain product its price would rise, thus stimulating producers to produce more while attracting new capital into that line of production. Conversely, if there was an excess and more was produced than purchased, over time capital and labor would withdraw and move into another area where demand was stronger. [The U.S. economy today, many would argue, is undergoing one of those shifts?seeking out the Next Big Thing.]

Smith famously wrote of the specialization of labor, with his best known example being that of the pin factory of his time, "where each of a dozen workers engaged in only one part of the process of manufacture, so that together they produced far more pins than if each worker produced whole pins; the price of pins then fell, and more pins could be used by more people." [Source: "A History of the Modern World"]

The same principle applied to international trade, with some countries producing a particular item more cheaply than others, so that by specializing and exchanging with others you benefited the whole.

The motivation for such production and exchange was to be the self-interest of the participants. Selfish? No, Smith argued, just realistic; and it was morally justified because it ultimately produced the maximum freedom and abundance of goods.

And though a bit repetitive on my part, I want to add Henry Kaufman's summarization of "unfettered, rational capitalism" as espoused by Adam Smith.

In a market-based view of the world, "the allocation of resources is purely and simply a consequence of the interplay of market forces. It is important to recognize that this seemingly abstract concept actually rests on a foundation of assumptions about human nature: that man is rational, ever striving to maximize returns in the marketplace; and that individuals and firms that do well will prosper, whereas those that fare poorly will suffer losses and even fail unless they modify their behavior and improve their efficiency."

But Kaufman argues that the chief problem with Smith's view "is that no industrial economy in the world is purely laissez-faire. Pure competition is a mental construct devised by economists to understand and illustrate certain principles. But nowhere is it a reality. The governments of capitalist nations everywhere recognize that major economic and financial disruptions can endanger the well-being of the larger society, and therefore intervene - to a greater or lesser degree - in the operation of the market."

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Finally, to digress a bit, in doing this piece I couldn't help but think of my political science advisor at Wake Forest University in Winston-Salem, N.C., Dr. Steintragger. I was a miserable student and he knew I wasn't going to turn my act around until I got into the real world, so when we sat down to discuss my academic record we'd end up talking about poker and beer instead (the drinking age was 18 then, in case you're worried). We got along fine, even though I know he was disappointed in me. But sometimes I think in one way he had more fun in our discussions than with some of his other students.

Anyway, Dr. Steintragger was a specialist in the British philosopher Jeremy Bentham (1748-1832) and in researching Adam Smith I came across Bentham's name because the latter is known for the theory of "utilitarianism"; a premise that "the greatest happiness of the greatest number" should be the subject of individual and government action. "Every law is an evil," Bentham once wrote, "for every law is an infraction of liberty." Bentham is also known for the famous question about any law or government institution, "does it work?" Don't you wish this was asked more often of the bureaucracy that exists in Washington today?

So Dr. Steintragger, I hope you're up in heaven playing poker and drinking beer. Just know one of your worst students finally got around to appreciating Jeremy Bentham, and in doing so furthered his appreciation for a damn good professor as well.

Sources:

Richard Brookhiser, "Alexander Hamilton"
"Chambers Dictionary of World History"
Norman Davies, "Europe: A History"
Henry Kaufman, "On Money and Markets"
John Merriman, "A History of Modern Europe"
R.R. Palmer, Joel Colton, Lloyd Kramer, "A History of the Modern World"
Peter N. Stearns, General Editor, "The Encyclopedia of World History"

Brian Trumbore